This article was co-authored by Marc Lindsey, President and Co-founder of Avenue4 LLC and Janine Goodman, Vice President and Co-founder of Avenue4 LLC.

On September 24, 2015, the free supply of IPv4 numbers in North America dwindled to zero. Despite fears to the contrary, IPv4 network operators have been able to support and extend their IP networks by purchasing the IPv4 address space they need from organizations with excess unused supply through the IPv4 market. The IPv4 market has proved to be an effective means of redistributing previously allocated IPv4 numbers, and could provide enough IPv4 addresses to facilitate the Internet's growth for several more years while the protracted migration to IPv6 is underway. Although the market has matured since we wrote our last "Insider's Guide” in May 2015, some old inefficiencies and impediments persist and new challenges have been exposed.

IPv6 Migration Hasn't Solved the Problem

IPv6 provides up to 3.4 x 10^38 unique IP addresses — easily enough to support the expected growth of the Internet for the foreseeable future. However, incompatibility between IPv4 and IPv6 has hobbled the transition. Despite its generous capacity, not enough network operators and end users are actually moving to IPv6 to justify retiring IPv4 networks. By the end of June 2018, IPv6 traffic represented less than a quarter of the total global Internet traffic, according to Google's IPv6 adoption statistics. Migration to IPv6 is simply not occurring fast enough to accommodate continued Internet expansion.

The CGN Band-Aid

As the world slowly migrates to IPv6, some network operators are leaning heavily on Carrier-grade Network Address Translation (CGNs) to help mitigate their IPv4 address consumption while continuing to extract value out of their existing IPv4 network infrastructure. CGNs allow many endpoints served by a single carrier to share a smaller number of unique IPv4 addresses. But CGNs have considerable drawbacks:

CGNs can frustrate law enforcement seeking to identify bad actors, and impede proper functioning of Internet security and other Web-enabled applications that depend on unique endpoint IP address mapping.

Extensive use of CGNs adds additional complexity to the networks that use them, and that complexity can compromise network performance, availability, reliability and scalability.

Industry experts believe end-point obfuscation caused by CGNs stunts the development and deployment of important Internet innovations such as IoT.

CGNs are not a viable long-term solution.

Workings of the Private Market

Meanwhile, IPv4 number trading between private parties is very active in North America, Europe and the Asia Pacific region. The IPv4 market has created powerful financial incentives for entities to free up excess inventory and sell it to organizations that still need more IPv4 numbers to operate and grow their networks.

The first widely publicized sale occurred in 2011 soon after the Internet Assigned Numbers Authority (IANA) exhausted its IPv4 supply. Microsoft purchased Nortel's IPv4 inventory of 666,624 legacy numbers for $7.5 million. Since then, the sale, lease or other conveyance of IP numbers has accelerated. At the end of 2017, ARIN recorded nearly 39 million numbers transferred between private parties. In the first half of 2018, over 24 million numbers were transferred — putting 2018 on track to reach the highest volume of ARIN registration transfers ever.

Despite the IPv4 marketplace's success, it operates inefficiently. There are no established standards of conduct, little transparency, and even less accountability. Many participants in the market struggle to define, from a legal perspective, what is being bought and sold. Contract terms and conditions can vary significantly, often derived from other industries and not always fit for the nuances of IPv4 transactions. There are no accepted means to establish market value. Market trades are handled via ad-hoc bi-lateral negotiations. And total transaction costs (e.g., registry charges, legal fees, escrow account charges, and broker/sales agent commissions) are not always apparent.

Notwithstanding these inefficiencies, buyers and sellers who follow key market-proven tips and practices can trade and transfer numbers successfully.

1. Define Your Preferred Deal Structure Early

Before participating in the marketplace, both buyers and sellers should understand the specific exclusive rights in IPv4 numbers that can be conveyed, identify and assess the trade-offs of the available deal approaches, and select the approach that best fits their business objectives. For both buyers and sellers, flexibility is vital to maximizing the value of their transactions.

One-time asset sales agreements are common. But large deals can also include options, installment payments and phased delivery, and other creative, value-enhancing features such as allowing the buyer to pay a portion of the purchase price in the form of credits that the seller can use to offset purchases of unrelated enterprise services supplied by the buyer.

2. Select the Right Advisors

The burgeoning IPv4 broker industry is an artifact of the new market. There are a slew of brokers now offering services specifically to IPv4 market participants. This pool of participants will keep increasing. There are no meaningful barriers to entry for IPv4 brokers. There also is no self-regulatory or independent body to enforce minimal qualifications, experience or codes of conduct. Many (incorrectly) assume that brokers appearing on the ARIN, RIPE and APNIC facilitator lists have been vetted by the RIRs to meet minimum experience, skill and ethical standards. The RIRs do not perform any such vetting. In fact, they expressly disclaim responsibility for the quality or suitability of their registered facilitators. Consequently, assessing the qualifications and ethics of prospective brokers, and managing the quality of their performance once engaged, is critical to success for market participants.

Buyers or sellers planning to enlist the assistance of a broker, advisor or other form of intermediary should test the broker's experience and understanding of the industry by interviewing multiple brokers and researching the credentials and backgrounds of the firms' professionals. Getting references in this business can be tough; no one wants to go on record.

The brokerage or market services agreement should clearly describe when the intermediary earns its fees and when those fees are payable. The service agreement should also disclose whose interest the broker represents, including whether it receives any form of compensation or fees from other parties in the deal. Setting and documenting expectations up front will help avoid disputes down the line.

3. Perform Due Diligence

Immediately upon initiating trade discussions, the prospective buyer and seller should sign a mutual confidentiality agreement and conduct due diligence.

Buyer due diligence begins when it obtains from the seller or its broker the specific designation of the available IP address range. The buyer should verify that the prospective seller is an active organization in good standing by checking the records of the secretary of state where the company is organized, examining corporate credit ratings and, for publicly traded companies, reviewing recent SEC filings. Buyers should also confirm that (a) the selling entity is, in fact, the current registrant or a legal successor of the listed registrant by investigating the RIR registration records for the IPv4 space being sold, and (b) the individual purporting to represent the seller is authorized to act on the seller's behalf.

A buyer should require its seller to disclose material facts about the block for sale, including whether (i) any of the numbers are currently in use, (ii) any third-parties have made a competing claim to control the block, or (iii) there are any known inaccuracies in the RIR registration records. Buyers also may want to analyze the reputation and prior usage of the numbers in the available block. Thorough due diligence may involve even more comprehensive written questions presented by the buyer to seller.

Seller due diligence is less intensive but still necessary. Eventually, trades become public knowledge when the RIR registration records are updated. Many sellers care about their reputations and prefer to conduct business with organizations that have compatible values. IPv4 transactions are no different.

Sellers should know their buyer's business before proceeding to the contract phase, and should also establish criteria to filter out potential buyers with whom the seller will not conduct business as part of its go-to-market strategy. In addition, the seller's due diligence should examine the potential buyer's ability to fulfill the payment terms of the contract. This financial assessment will determine when it may be prudent to require an up-front deposit or employ an escrow as part of the payment terms. Sellers should also verify the authority of the people claiming to represent potential buyers.

Where registration transfer is a closing condition, examining the seller's prior transfer experience and its ability to successfully register with the relevant RIR the quantity of numbers purchased is important. For buyers in the ARIN or APNIC region, sellers should consider, and weight favorably, offers from buyers that have been pre-qualified by the applicable RIR to receive the block sizes in the deal. Pre-approval will alleviate some uncertainty in the registration transfer approval process.

No transaction is without some risk. The objective of properly conducted due diligence is to identify — before the agreement is signed — transactions that present unreasonable or readily avoidable risks. If due diligence reveals that these risks are within acceptable parameters for both buyer and seller, the parties can then enter into contract negotiations to fairly allocate reasonable risks between them.

4. Focus on the Terms and Conditions that Matter

The uncertainty or misperception about the legal rights attached to IPv4 numbers causes some buyers to define in their asset purchase agreements the rights they believe they will acquire, relying on their experience with traditional tangible property-based asset purchase arrangements or merger and acquisition deals.

Buyers, for example, seek guarantees that they will receive good and clear "title" to the IPv4 numbers. Recognizing that ownership of IP numbers is not settled law, sellers, who may otherwise believe they possess title to their numbers, should resist contractually overcommitting to convey title — at least until the question of ownership is resolved by the courts. On a related point, some buyers demand sellers represent and warrant that they will convey to the buyer unconstrained exclusive use rights. But IP numbers are part of the Internet Protocol, which relies on the operation of interconnected global registries, servers and networks. And any range of IP numbers can be used without constraint on private networks. Sellers' promises to convey exclusive rights in their IPv4 numbers should, therefore, be limited to the right to register in the RIR system, and use for Public Internet routing, the IPv4 numbers being traded.

Some additional key contract terms to focus on include:

Clear termination triggers that can only be invoked prior to the closing of the transaction

Appropriate limits on liabilities and disclaimers for both parties

Descriptions of any responsibilities and liabilities that survive the closing, and if some survive, for how long

Representations and warranties tailored for the manageable risks and conditions specific to IPv4 sales and transfers

Scope and duration of each party's post-closing obligations

Delineation of the duties, liabilities and costs that are assumed by the buyer once the IPv4 addresses are sold versus those that are retained by the seller

Terms that secure the transfer and payment (e.g., third-party escrow) for the in-scope address space

Ready to Navigate the Market

The private IPv4 market is evolving. It has been used effectively to redistribute millions of underutilized IPv4 assets, yet buyers and sellers continue to face obstacles. Market participants can achieve their business objectives by employing market-proven tips and best practices. Network operators that lack the resources or insight to navigate the challenges of today's market remain at risk of being competitively disadvantaged.

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